The political turmoil in two important countries favors the Dollar
|It’s fairly rare for political events to move the FX market this much. We have three political crises, starting with the US government shutdown and Trump vs. people., with the Supreme Court coming up on the inside. Then it was the Japanese party election that plunged the yen down some 200 points, dragging the cross rates along. Then the French PM resignation was a shotgun blast into the euro. Still, the euro/yen has now hit an all-time high.
It’s not irrelevant that both the Japanese party leader and the French opposition accept gigantic budget deficits. Reuters reports “With Takaichi opposed to Bank of Japan tightening and a supporter of further fiscal stimulus, her win has sent long-shaky 30-year Japanese government bond yields to new record highs and sent Japan's yield curve to its highest in a month as October BoJ rate hike bets evaporated.”
It's hard to see a country with an unhinged president and a shutdown government as any kind of safe-haven from political turmoil elsewhere in the world, but that’s what we are getting. The big, fat excuse is the robust and resilient economy running at 3.8%, if we like the Atlanta Fed GDPNow. France is getting GDP at 0.6-0.7% and Japan, 0.5%.
Quite apart from Japanese misogyny and the LDP having lost the majority, French stubbornness is a real threat. Bloomberg writes that the “lame duck Macron is also a sitting duck, too.”
Forecast
The political turmoil in two important countries favors the dollar, however ridiculous that seems. And it’s not going to get resolved any time soon. A risk-off sentiment that favors the dollar is about the only bolt-hole out there (except gold).
At some point the data we do get from the private sector will start affecting the outlook and the positioning. In the meanwhile, it looks like we have to put up with yet another dollar pushback. It could be substantial.
Tidbit: We normally avoid writing about the Hamas-Israel war but want to point out something from the most stunningly brilliant arguer of all time, who said “Don’t feed the crocodile because it will come after you after it devours Israel." Yes, Netanyahu, who gets you to accept the first premise (the crocodile), after which everything is obvious and must be true. He roped in Trump this way, who is hardly a match for Bibi. The quote comes from a Euronews interview yesterday.
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